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England’s funding council fears the new funding system could leave it powerless to fine universities recruiting too many students on taxpayer-backed loans.

The Higher Education Funding Council for England is seeking legal advice on what controls, if any, it can exert over the new system’s multibillion-pound injection of public-backed loan funding. Under the regime, most teaching funding is allocated via loans to students rather than by direct grants to universities.

With legislation that would have granted Hefce new powers under the model shelved indefinitely, the funding council has been forced to start its own work on a replacement for the financial memorandum - the contract which has until now put universities under key obligations in exchange for public funding.

As a result, Hefce is seeking legal opinion about whether, under present laws, it would be able to attach conditions to funding routed via the Student Loans Company.

Minutes from Hefce’s October board meeting, published recently, warn that the funding council is “unable to implement any sanctions on funding that is received by institutions from other public sources”; and that the “government’s aim of not exceeding the student number control … will be increasingly challenging for Hefce to achieve in two/three years”.

And minutes from a December meeting of the joint Hefce-SLC Regulatory Partnership Group state that the two bodies “would give formal advice to ministers” on the financial memorandum after the government consultation on private providers and “as soon as legal opinion on the proposal to extend course designation arrangements became available”.

Changes to the financial memorandum have been seen as a possible catalyst for the partial privatisation of elite universities, if they seek to opt out of the public-backed loan system because of continued conditions attached to the funding.

Senior figures expect that Hefce will seek to continue with a single financial memorandum covering teaching and research - which could effectively give it a lever over the teaching activities of universities through their research funding, heading off any drive to privatisation by the elite.

But some predict that post-1992 universities, which may receive little or no Hefce money for research or for teaching high-cost subjects, will be able to over-recruit students without fear of any Hefce sanction.

Michael Shattock, visiting professor of higher education management at the Institute of Education, University of London, also said Hefce would struggle to control the teaching activities of research-intensive universities by threatening to withhold research funding. Hefce “would be subject to judicial review by any self-respecting HEI” if it took such action, he added.

On the question of universities going private, Professor Shattock said: “All they have to do is sit tight and for those who do not benefit from (research funding) it will happen naturally, and for those who do, the constraints will be so reduced that there will be no advantage in opting out.”

Dennis Farrington, co-author of The Law of Higher Education, said he expected the National Audit Office, which is currently compiling a report on the student loans system, to resolve “whether in its opinion SLC money is public money”.

Dr Farrington said that after the NAO report, expected in the autumn, “some arrangement for imposing conditions could be agreed”. But he added: “Clearly this should have been sorted out before the new system was introduced.”